All Things in Moderation

Vital Statistics:

Stocks are flattish as we await earnings from Nvidia after the close. Bonds and MBS are down small.

Consumer confidence fell sharply in February, according to the Conference Board. Both the Present Situation index and the Expectations index fell. “In February, consumer confidence registered the largest monthly decline since August 2021,” said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. “This is the third consecutive month on month decline, bringing the Index to the bottom of the range that has prevailed since 2022. Of the five components of the Index, only consumers’ assessment of present business conditions improved, albeit slightly. Views of current labor market conditions weakened. Consumers became pessimistic about future business conditions and less optimistic about future income. Pessimism about future employment prospects worsened and reached a ten-month high.”

The Expectations Index is back at levels usually associated with an impending recession. Inflation and tariff fears are the biggest drivers, though we are also seeing consumers become less constructive on the labor market.

Richmond Fed President Thomas Barkin said the fight against inflation is facing headwinds such as changing demographics and higher government spending. “If headwinds persist, we may well need to use policy to lean against that wind,” he said. In other words, rates may have to be higher for longer. “We learned in the ’70s that if you back off inflation too soon, you can allow it to re-emerge. No one wants to pay that price.”

The price differential between new construction and existing homes has disappeared, according to the NAHB. Limited inventory of existing homes is pushing median sales prices higher, while builder decisions (a focus on lower-priced offerings) is the driver for new homes. In the fourth quarter of 2024, the differential was only around $9,000 versus a $50,000 10 year average.

Mortgage applications fell 1.2% last week as purchases rose 0.2% and refis fell 3.6%. “Treasury yields moved lower on softer consumer spending data as consumers are feeling somewhat less upbeat about the economy and job market. This pushed mortgage rates lower, with the 30-year fixed rate decreasing to 6.88 percent, the lowest rate since mid-December,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Applications were about one percent lower for the week, which included the President’s Day holiday, as purchase applications stayed flat from a week ago while refinance applications saw a small decline. Purchase applications were up 3 percent from the same week last year. Increasing for-sale inventory in some markets has provided prospective buyers more options as we approach the spring homebuying season.”

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Vital Statistics:

Stocks are lower this morning on no real news. Bonds and MBS are down.

Housing starts fell to a seasonally adjusted annual rate of 1.366 million in January. This is a 9.8% decreased compared to December, and a 0.7% decrease on a year-over-year basis. Building Permits were flat at 1.48 million.

Homebuilder sentiment crashed in February, according to the NAHB Housing Market Index. Blame Tariffs. “While builders hold out hope for pro-development policies, particularly for regulatory reform, policy uncertainty and cost factors created a reset for 2025 expectations in the most recent HMI,” said NAHB Chairman Carl Harris, a custom home builder from Wichita, Kan. “Uncertainty on the tariff front helped push builders’ expectations for future sales volume down to the lowest level since December 2023. Incentive use may also be weakening as a sales strategy as elevated interest rates reduce the pool of eligible home buyers.”

“With 32% of appliances and 30% of softwood lumber coming from international trade, uncertainty over the scale and scope of tariffs has builders further concerned about costs,” said NAHB Chief Economist Robert Dietz. “Reflecting this outlook, builder responses collected prior to a pause for the proposed tariffs on goods from Canada and Mexico yielded a lower HMI reading of 38, while those collected after the announced one-month pause produced a score of 44. Addressing the elevated pace of shelter inflation requires bending the housing cost curve to enable adding more attainable housing.”

So the HMI report was positively impacted by the 30 day suspension of tariffs.

Mortgage applications fell 6.6% last week as purchases fell 6% and refis fell 7%. “Mortgage rates decreased on average over the week, as markets brushed off unexpectedly strong inflation data. Despite mortgage rates declining, with the 30-year fixed mortgage rate dropping to 6.93 percent, mortgage applications decreased to their slowest pace since the beginning of the year,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications were down for the week, as buyers remained on the fence, although loosening inventory may help support activity in the coming months. Refinance applications had been rising in previous weeks but dipped as rates remained close to 7 percent.”

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Vital Statistics:

Stocks are flat after the CPI came in higher than expected. Bonds and MBS are down.

Consumer prices rose 0.5% MOM in January, according to the BLS. This was higher than the 0.3% Street expectation. The core rate rose 0.4%. Given that we have typically seen a bump in January as companies raise prices in the new year, a 0.3% increase was probably tough to get. On a year-over-year basis, the headline rate rose 3% and the core rate rose 3.3%.

The shelter index rose 4.4% on a YOY basis, the smallest increase since January, 2022. Transportation (especially motor vehicle insurance) was up 8% on a YOY basis.

The bond market sold off pretty heavily on the number, with the 10 year yield rising about 10 basis points. That said, sentiment in the bond market remains lousy given the tariff backdrop, and rates are up big in Europe and Asia today.

I showed the chart below yesterday, which gives an idea of how much annual inflation is front-loaded in the first quarter, and how inflation seems to tail off as the year goes on. I put a red line on the chart to show the January of 2025 number. The 0.3% expectation was basically a heavy lift, given that pre-pandemic January inflation typically came in at that level, but we are close. Things are improving.

Jerome Powell testified in front of the Senate yesterday as part of his semiannual Humprey-Hawkins testimony. Here are his prepared remarks.

With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the FOMC will assess incoming data, the evolving outlook, and the balance of risks.

The March Fed Funds futures see little to no chance of a rate cut, and the December futures see a 32% chance of no cuts this year. The bottom line is that rates are still restrictive but as long as the economy continues to behave they will remain that way.

Mortgage applications rose 2.3% last week as purchases fell 2% and refis rose 10%. “Mortgage rates moved slightly lower last week, which led to the pace of refinance applications reaching its strongest week since October 2024,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The average loan size for refinance borrowers increased, as these borrowers tend to be more responsive for a given change in rates. Purchase applications were down from the previous week’s level but were slightly ahead of last year’s pace. The average loan size for a purchase application increased to its highest level since March 2022 at $456,100, partially driven by fewer FHA purchase applications but more VA loans compared to the previous week.”

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Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are down small.

The services PMI declined in January, according to the Institute for Supply Management. The index declined from 54% to 52.8% on weaker activity and orders, however it remains in expansion territory, where it has been for nearly the past 5 years.

While activity declined somewhat, there were two bright spots. Employment increased by 1% and prices declined by 4%. Tariffs remain a worry. “January was the second month in a row with all four subindexes that directly factor into the Services PMI^® — Business Activity, New Orders, Employment and Supplier Deliveries — in expansion territory. Slower growth in the Business Activity and New Orders indexes led to the lower composite index reading. Poor weather conditions were highlighted by many respondents as impacting business levels and production. Like last month, many panelists also mentioned preparations or concerns related to potential U.S. government tariff actions; however, there was little mention of current business impacts as a result.”

Announced job cuts increased 28% to 49,795 in January, according to the Challenger and Gray Job Cut Report. While this is an increase from December, there is a big seasonal element, and it is a decrease of 40% compared to January of 2024. Hiring plans increased.

Productivity declined in the fourth quarter to 1.2% compared to 2.3% in the third quarter. Unit labor costs increased from 0.5% to 3.0%. This might have explained why inflation reappeared in Q4. Output increased 2.3% and hours worked increased 1%.

Productivity is a big driver of non-inflationary growth, and it has been trending down for the past couple of years. Note that productivity collapsed in 2022, right about the time inflation was peaking

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